Earnings season kicks off next week… and it’ll inevitably stir up some volatility across the market.

After all, earnings are a critical barometer of a company’s health. Positive results can send the stock shooting higher… while poor results can send investors running for the exits.

But there are several factors to consider when it comes to evaluating earnings. Revenue… EPS… forward guidance… year-over-year comparisons… sector-specific metrics… Which number determines whether a stock will rise or fall after posting results?

While they all matter, of course, there’s one gauge in particular that will often tell you which way the stock will move after earnings.

Analyst expectations.

On its surface, this might not seem as important as the other metrics… But today, we’ll explain how understanding and leveraging analyst estimates can mean all the difference between substantial gains and substantial losses during earnings season.

2 examples of the importance of analyst estimates

At the beginning of August, it looked like Levi Strauss & Co. (LEVI) might become a turnaround story. The stock had been performing poorly for a while. After reporting mixed second quarter (Q2) earnings on June 26, shares fell over 25% to around $17 per share.

But analysts were projecting major year-over-year earnings growth of 11%, and the stock started creeping higher.

For Q3, the company posted decent results. Earnings per share (EPS) came in at $0.33, more than 15% higher than Q3 2023’s $0.28.

Yet, the stock got crushed, ending the day down around 8%.

Why?

Because despite the company posting better EPS on a year-over-year basis, revenue of $1.52 billion came in lower than estimates of $1.55 billion. Plus, the company reduces its sales guidance, significantly undershooting sky-high analyst expectations.

Meanwhile, for Q3, Best Buy (BBY) was projected to see earnings and sales decline year over year…

Despite posting mediocre year-over-year results, the stock surged 15% following its earnings as it was able to blow past super conservative estimates. It currently trades at 30-month highs.

Both stories are examples of the relationship between analyst estimates and actual performance… Understanding this relationship could save you from making costly mistakes—or help you identify profitable opportunities.

The bottom line

While it’s important to consider how well a stock is performing year over year—particularly when considering long-term investments—in the shorter term, analyst expectations can provide an excellent gauge of whether a stock will surge or crash in the wake of its earnings.

Don’t let yourself be blindsided by earnings surprises. Start incorporating analyst estimates into your investment strategy today.

Or let Frank and Daniel do the due diligence for you. Join WSU Premium today for market insights—including in-depth earnings coverage… as well as weekly Dollar Stock Club stock tips.